From Cradle to Junkyard: Assessing the life cycle Greenhouse Gas Benefits of Electric Vehicles

Published August 25, 2015 by David Rapson.

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U.S. programs subsidize electric vehicles (EVs) in part to reduce greenhouse gas (GHG) emissions. We model a suite of life cycle GHG emissions considerations to estimate the GHG abatement potential from switching from an internal combustion engine vehicle (ICE) to an EV in the continental U.S. The GHG intensity of EVs hinges on the electricity and ambient temperature when charged and operated. Both have high spatial and temporal heterogeneity, yet are typically modeled inadequately or overlooked entirely. We calculate marginal emissions, including renewables, for electricity by region and test forecasted grid composition to estimate future performance. Location and timing of charging are important GHG determinants, but temperature effects on EV performance can be equally important. On average, EVs slightly reduce GHGs relative to ICEs, but there are many regions where EVs provide a decisive benefit and others where EVs are significantly worse. The forecasted grid shifts from coal towards renewables, improving EV performance; the GHG benefit per EV in western states is roughly $425 today and $2400 in 2040.

Commodity Storage and the Market Effects of Biofuel Policies

Published July 1, 2015 by Aaron Smith.
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US legislation passed in 2007 (RFS2) increased by about 1.3 billion bushels the net amount of corn required to be processed annually into ethanol for motor-fuel use. Using modern time-series methods, we estimate that corn prices were about 30 percent higher between 2006 and 2014 than they would have been but for RFS2 and if pre-2006 trends had continued. We estimate a permanent corn demand increase of 1.3 billion bushels increased the long-run price by 31% (90% confidence interval is [5%,95%]). Our identification strategy is unique in the literature because it enables estimation of the effects of transitory shocks, such as weather, separately from the effects of persistent shocks, such as the ethanol mandate.

Rethinking Trade-Exposure: The Incidence of Environmental Charges in the Nitrogenous Fertilizer Industry

Published June 1, 2015 by Jacob Humer and James Bushnell.
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The imposition of environmental regulations, such as greenhouse gas charges, to domestic manufacturing traditionally creates concerns over the impacts of those regulations on international competition and downstream product prices. The US Nitrogen fertilizer industry, an energy-intensive trade-exposed industry, has been considered by conventional metrics to be one of the most vulnerable to such effects. Since 2010 the industry has undergone increased concentration of producers and a dramatic reduction in US natural gas prices. While the decline in domestic gas prices has reduced production costs, it has not produced a corresponding decrease in fertilizer prices. Our research establishes that the pass-through of changes in natural gas prices, a key input to nitrogenous fertilizer, declined from roughly 80% prior to 2010 to effectively zero through 2014. One implication of this change in pricing dynamics is that the imposition of greenhouse gas (GHG) regulations on producers of nitrogen fertilizers would have almost no impact on fertilizer prices. Within the context of a GHG cap-and-trade program, the allocation of emissions allowances as considered under proposed Federal legislation, and as practiced in California today, would likely result in a transfer to fertilizer producers on the order of hundreds of millions of dollars with no impact on fertilizer prices or emissions.

Utilization and Customer Behavior: Smart Choices for the Smart Grid

Published May 3, 2015 by Jeremy B. Smith.
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The smart grid offers a wide array of opportunities to improve efficiency of the electricity grid via load management policies. This chapter reviews the current state of knowledge in the economics literature as it relates to time-varying pricing and to behavioral interventions, which together comprise a large portion of regulators’ policy choice set. The authors present evidence that consumers respond to financial incentives, but that these are not the only determinants of behavior. For example, consumers are often uninformed and inattentive, and exhibit a tendency to respond to non-monetary incentives as well as monetary. The authors conclude that time-varying pricing is an effective and essential policy instrument, while instruments designed to boost customer attentiveness and allow households to become better informed about their energy use play an important complementary role. Smart meters are crucial in making such a policy package feasible. The power of randomized experimental designs, which underlie much of the evidence that is presented, is also discussed. The authors highlight important areas for future research, and recommend that such future research efforts continue to leverage randomized designs.

Overlapping Environmental Policies and the Impact on Pollution

Published April 29, 2015 by Kevin Novan.
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In an effort to reduce pollution from the electricity sector, governments are heavily subsidizing renewables. The subsidies, however, are not being used in isolation. Instead, they are often provided in regions where certain pollutants are regulated by cap-and-trade programs. I demonstrate that, when combined with a cap-and-trade program, renewable subsidies can cause an undesirable outcome – they can increase emissions of unregulated pollutants. Focusing on the region regulated by the Clean Air Interstate Rule, I show that, if the EPA sets a binding cap on NOX , expanding renewable capacity not only offsets zero tons of NOX , it will increase SO2 emissions.

Commercial and Industrial Demand Response Under Mandatory Time-of-Use Electricity Pricing

Published March 17, 2015 by David Rapson.
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This paper is the first to evaluate the impact of a large-scale field deployment of mandatory time-of-use (TOU) pricing on the energy use of commercial and industrial firms. The regulation imposes higher user prices during hours when electricity is generally more expensive to produce, and is the most common way for time-varying incentives to be transmitted to retail electricity customers. We exploit a natural experiment that arises from the rules governing the program to present evidence that TOU pricing induced negligible change in overall usage, peak usage or peak load. As such, economic efficiency was not increased by this regulation. Bill levels and volatility exhibit only minor shifts, suggesting that concerns from advocacy groups about increased expenditure and customer risk exposure have been overstated.

Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard

Published May 7, 2015 by Aaron Smith.
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The Renewable Fuel Standard (RFS2) is a US federal policy that mandates large increases in biofuel consumption and is implemented using a market for tradeable compliance credits. We develop a dynamic model of compliance with the RFS2 in which firms face uncertainty about future relative fuel prices and future enforcement of the mandate. Our model shows how changes in expected future enforcement can have dramatic effects on the price of compliance credits and thereby have large effects on the current cost of compliance. To illustrate, we estimate empirically the effect of three ‘policy shocks’ that reduced the expected 2014 mandates and introduced significant uncertainty regarding future compliance schedules. We estimate that one shock, the release of the 2013 Final Rule in which the Environmental Protection Agency suggested it would likely reduce the 2014 mandate, decreased the value of the subsidy (tax) provided by the RFS2 to the biofuel (fossil fuel) industry in 2013 by nearly $8 billion. Similar shocks followed with two subsequent events that released preliminary versions of the 2014 mandate reductions. We conclude that the goals of the RFS2 would be better served through active management of compliance credit markets.